A sweeping overhaul of India’s Goods and Services Tax (GST) regime, effective from September 22, 2025, is poised to significantly reshape the commercial real estate landscape, introducing new challenges and costs for property owners, tenants, and developers. Announced as part of the GST 2.0 reforms, these changes include a pivotal shift in the Reverse Charge Mechanism (RCM) for commercial leasing and the elimination of Input Tax Credit (ITC) for developers, sparking concerns about rising rental prices and increased compliance burdens. While the reforms aim to simplify taxation and boost affordability in sectors like housing, the commercial real estate segment is preparing for a period of adjustment.
Reverse Charge Mechanism Shifts to Tenants
One of the most significant changes in the GST overhaul is the transfer of GST payment responsibility under the Reverse Charge Mechanism (RCM) from property owners to tenants in certain commercial leasing scenarios. According to real estate consultancy ANAROCK, if a property owner is not registered under GST, the tenant will now be required to pay an 18% GST on the rental amount directly to the government. This marks a departure from the previous system, where property owners bore the responsibility for remitting GST on rent, regardless of their registration status.
This shift is expected to increase administrative complexity for businesses and tenants leasing commercial spaces. For small and medium enterprises (SMEs) and traders, managing direct GST payments adds a new layer of compliance, requiring them to navigate tax filings and ensure timely payments. “The RCM shift places a significant burden on tenants, particularly small businesses that may lack the resources to handle additional tax obligations,” said an ANAROCK spokesperson. The change could also lead to disputes between tenants and unregistered landlords over transparency in rental agreements and tax responsibilities.
Elimination of Input Tax Credit for Commercial Leasing
In another major blow to the commercial real estate sector, the GST Council has discontinued the Input Tax Credit (ITC) for developers engaged in commercial property leasing. Previously, developers could claim tax credits on GST paid for construction materials, services, and other project-related costs, which helped offset their tax liabilities. The removal of ITC is likely to increase operational costs for developers, as they can no longer reduce their tax burden through credits on inputs like cement, steel, and professional services.
This policy change is expected to have a ripple effect on the commercial leasing market. With developers facing higher net costs, industry experts predict that these expenses will be passed on to tenants in the form of higher rental prices. “The loss of ITC is a significant challenge for developers, particularly in the commercial segment, where margins are already tight,” said a representative from the Confederation of Real Estate Developers’ Associations of India (CREDAI). “We anticipate a 5-8% increase in rental costs for office spaces in major cities over the next year.” This rise could impact businesses, startups, and multinational corporations seeking office spaces in urban hubs like Mumbai, Bangalore, and Delhi.
Potential Impact on Rental Prices and Market Dynamics
The combined effect of the RCM shift and ITC elimination is likely to reshape the commercial real estate market in India. Higher operational costs for developers, coupled with the new tax burden on tenants, could drive up rental prices for office spaces, retail outlets, and co-working facilities. Cities with high demand for commercial properties, such as Bangalore and Gurugram, may see the most pronounced increases, potentially affecting the affordability of office spaces for small businesses and startups.
The timing of these reforms, coinciding with the festive season, adds complexity to the market outlook. While the GST overhaul aims to stimulate consumption and economic growth through a simplified two-slab structure (5% and 18%, with a 40% rate for luxury and “sin” goods), the commercial real estate sector faces short-term challenges. “The increased compliance burden and loss of ITC could deter some businesses from leasing new spaces, especially in a market already navigating post-pandemic recovery,” noted a real estate analyst from CBRE India. However, some experts believe that the streamlined tax structure could eventually attract more institutional investment by reducing compliance disputes and improving transparency.
A Silver Lining for Affordable Housing
While the commercial sector braces for higher costs, the GST reforms offer a brighter outlook for the residential real estate market, particularly in the affordable housing segment. The reduction of GST on key construction materials, such as cement (from 28% to 18%) and granite blocks and sand-lime bricks (from 12% to 5%), is expected to lower construction costs by 3-5%, according to ANAROCK Research. These savings could translate into more affordable home prices, boosting demand for budget homes priced below ₹40 lakh. The simplified two-slab GST structure (5% for residential properties and 1% for affordable housing, both without ITC) continues to support first-time buyers and middle-income families, aligning with the government’s goal of addressing India’s urban housing shortage of nearly 10 million units.
“The GST 2.0 reforms are a game-changer for affordable housing,” said Ashish Kukreja, CEO of Homesfy.in. “Lower input costs and a transparent tax regime will enable developers to launch more projects, creating jobs and making homeownership more accessible.” The reforms are expected to particularly benefit Tier-II and Tier-III cities, where demand for affordable housing is rising due to urbanization and infrastructure development under initiatives like the Smart Cities Mission.
Industry Reactions and Future Outlook
Real estate industry leaders have expressed mixed sentiments about the GST overhaul. While the residential sector welcomes the cost reductions and simplified compliance, the commercial segment is preparing for a period of adjustment. “The RCM shift and ITC elimination will require developers and tenants to rethink their financial strategies,” said Santosh Agarwal, CFO of Alpha Corp Development Limited. “However, the long-term benefits of a simplified tax system could outweigh these challenges by attracting more investment and fostering market stability.”
The government’s focus on easing compliance through pre-filled GST returns, automated refund processes, and tech-enabled registration systems is expected to reduce administrative burdens for developers in the long run. These measures, combined with the elimination of the inverted duty structure, aim to free up working capital and improve liquidity for micro, small, and medium enterprises (MSMEs) in the real estate sector, which employs over 7 crore Indians and is the country’s second-largest employer.
As the GST 2.0 reforms roll out ahead of Diwali 2025, the real estate sector is at a crossroads. The residential market, particularly affordable housing, is poised for growth, driven by lower construction costs and increased buyer confidence. However, the commercial segment faces immediate challenges, with rising rental costs and compliance burdens potentially impacting leasing activity. Industry stakeholders are calling for clarity on transitional provisions and tax credit flows to ensure a smooth shift. With India’s real estate market projected to reach $1 trillion by 2030, the success of these reforms will depend on their ability to balance affordability, investment, and economic growth in a dynamic and evolving sector.
